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Feds shouldn’t add ‘fuel to the fire’ as inflation soars: David Dodge

The federal government needs to “postpone some of the expenditure enhancements” from the last budget in order to help get inflation back under control, according to former Bank of Canada Governor David Dodge.

The Bennett Jones LLP senior advisor said politicians “don’t like the alternative of having to restrict spending in order to help control demand.”

“The best we can hope for is they don’t add fuel to the fire by providing a bunch of tax cuts or expenditure increases along the way,” Dodge said in an interview on Tuesday.

Dodge said the federal government should postpone a number of spending initiatives announced in the latest budget for at least a year, such as the increase to Old Age Security for Canadians over 75 and home care services.

“Let me remind you that the government signed the agreement with the Bank of Canada and they acknowledged their responsibility to play a role in dealing with inflation,” Dodge said.

“I think it’s very important to remind [them], ‘Remember that?’ and always ask the [finance] minister why she’s not doing what she can from her side in order to help control the excess demand at the moment.”

ODDS OF A SOFT LANDING

Economists across the country are paying close attention to whether the Bank of Canada will be able to pull off a soft landing amid a sharp rise in interest rates.

Dodge said a soft landing “like beauty, is in the eyes of the beholder and it’s not a very well-defined term”, but he thinks in order to get supply and demand back in balance, Canada needs at least six to 12 months of zero economic growth.

“The unfortunate choice we have is either to dampen demand by allowing prices to rise and rise a lot, or to dampen demand through monetary policy and somewhat more restrictive fiscal policy,” Dodge said.

In a recent Q&A with the Canadian Federation of Independent Business (CFIB), Bank of Canada Govenor Tiff Macklem said he’s still optimistic about the Canadian economy achieving a soft landing next year.

“1.75 [per cent] growth is positive growth. The economy is still growing. That’s the soft landing. It’s not a recession,” Macklem said.

“There is a lot of commentary out there that central banks are going to have a very hard time getting inflation down without a recession. When you look at history, it hasn’t happened very often.”

He’s not the only Canadian policy maker who sees a soft landing on the horizon.

“Inflation is certainly elevated and I would say is our biggest concern right now,” Deputy Prime Minister and Finance Minister Chrystia Freeland said in an interview with Bloomberg Television over the weekend.

“But the Bank of Canada has been acting forcefully and I think it is entirely reasonable to hope for a soft landing for Canada.”

ANTICIPATING ANOTHER MONTH OF RISING INFLATION

Many economists predict inflation climbed even higher in June, after it approached a four-decade high in May.

The consumer price index rose to 7.7 per hundred year-over-year in May, which was the highest level since January 1983. The latest read on Canadian inflation will be released on Wednesday.

But Dodge said he thinks inflation could hit a peak this summer and start to fall back down by the fall.

“I think there’s a pretty reasonable chance that month-over-month inflation, by the time we get to fall and early winter, will indeed be at much more manageable levels,” Dodge said.

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